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John Simmonds, CEM

Hedge Fund investments often fall short, says CEM Benchmarking research


CEM Benchmarking (CEM), a provider of benchmarking information on pension scheme costs and performance, has released the results of an in-depth study on the growth, value and success of hedge funds; ‘Hedge Fund Reality Check’.

The research provides analysis of realised hedge fund portfolio returns from nearly 400 large global investors. Whereas only a handful of large institutional investors had money invested in hedge funds in 2000 (around 2 per cent of funds), this grew to more than 50 per cent by 2016 – representing a twenty-five-fold increase.
 
Alexander Beath, CEM Benchmarking’s Senior Research Analyst and lead author of the study, says: “Institutional investors use hedge funds for a number of reasons, with improved returns, diversification and the promise of risk mitigation the most cited. One problem, however, has always been how to measure success, with a key issue being that most hedge fund indices are flawed by either failing to offer a fair basis for comparison (eg. cash plus a premium), or they aren’t investable.
 
“Although some investors have invested in hedge funds because they are supposedly uncorrelated, our research suggests that most hedge funds, at the total portfolio level, behave remarkably like simple equity/debt blends. In effect, it’s possible for many funds to buy a passive alternative at very low cost, that still has very similar risk and return characteristics. That is not to say that all performance has been bad. In fact, the research shows an impressive four out of five hedge fund portfolios would beat the CEM calculated equity/debt ‘optimised’ index before taking account of costs.”
 
John Simmonds (pictured), Principal at CEM, says: “The real story comes, however, when costs are taken into account. Only 36 per cent of funds beat the CEM calculated benchmark after taking account of fees, a big drop from the four out of five. The funds in our study typically paid 2.2 per cent in hedge fund fees in 2016 – and higher still for funds using fund-of-fund structures, which tend to ‘layer in’ more fees. After taking account of fees, the research shows the average hedge fund actually underperformed by -1.27 per cent.”

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